UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                   ACTV, Inc.
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             (Exact name of registrant as specified in its charter)

Delaware                                                       94-2907258
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(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

1270 Avenue of the Americas
New York, New York                                                10020
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(Address of principal executive offices)                        (Zip Code)

(212) 262-2570 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class                         Name of exchange on which registered

Common Stock, Par Value $0.10               Boston Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:

                     Common Stock, par value $0.10 per share
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No _

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on The Nasdaq Stock Market closing price
on March 24, 1998) was $21,748,026.

As of March 25, 1997, there were 16,904,024 shares of the registrant's common
stock outstanding.

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PART I

Item 1.     BUSINESS

General

      The corporate structure of ACTV, Inc. ("Company") is as follows: ACTV,
Inc. owns 100% of the common shares of ACTV Holdings, Inc. ("Holdings"), which
wholly owns (i) ACTV Entertainment, Inc. and (ii) ACTV Net, Inc. ACTV
Entertainment, Inc., in turn, wholly owns The Texas Individualized Television
Network, Inc. and a number of regional subsidiaries that are currently inactive.

      The Company and Holdings have granted the appropriate operating
subsidiaries exclusive, perpetual licenses to use the Company's proprietary
technologies for individualized television programming and for on-line learning
software within their respective business areas and have given such subsidiaries
the right to sublicense the respective technologies. Under the licenses, each
subsidiary will pay the Company royalties on net revenues if the subsidiary is
no longer majority owned by the Company, and royalties on the net sales of any
sublicensee.

      Unless otherwise indicated, all references in this Form 10-K to the
Company or ACTV include ACTV, Inc. and all of its subsidiaries.

      This document includes certain forward looking statements about the
Company and its industry that are based on management's current expectations.
Actual results may differ materially as a result of any one or more of the risks
identified in the Company's filings under the Securities Exchange Act of 1934.

  Board Policy and Corporate Structure of Subsidiaries

      The policy of the Company is and has been, as set forth in the prospectus
relating to its initial public offering in May 1990, "to license [the Company's]
technology and arrange joint ventures for its use in a number of different
industries." The Board of Directors has previously adopted and reaffirmed in
1998 a plan to take effect in the event that an entity deemed not likely to
further such policy or to act inconsistently with the best interests of all the
Company's shareholders seeks to acquire or has acquired 20% or more of the
Company. The text of the Board resolution relating to this issue is as follows:

      "Resolved, that it being in the best interests of the Corporation and the
shareholders of the Corporation, the Board of Directors hereby approves and
adopts a plan that, in the event that the Board of Directors determines that an
acquirer has acquired, or seeks to acquire, 20% or more of the Corporation and
that such acquirer is not a suitable acquirer since such acquirer will not
further the Corporation's policy of acting as a broad licensor of the ACTV
proprietary technologies, or is otherwise likely to act inconsistently with the
best interests of all the Corporation's shareholders, the Board is authorized to
take all necessary action (including the hiring of an investment banking firm),
to offer, by invitation, non-exclusive licenses to use and exploit the ACTV
proprietary technologies. The terms of such licenses may include the payment of
royalties consisting of a significant initial advance, minimum annual payments
and/or a percentage of annual net sales, and shall be consistent with, and no
less favorable than, the terms of existing licenses. The Board is authorized, in
its discretion, to employ an independent investment banking firm for the purpose
of evaluating the terms of such licenses. In the event that an acquirer is
identified and an auction is commenced, the

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Board reserves the right to terminate the auction at any time prior to the
Corporation's entering into the non-exclusive license agreement."

      The Board has authorized that each of the Company's direct and indirect
subsidiaries (except Holdings) have two classes of common stock and one class of
preferred stock. The second class of common stock, which is equivalent in the
number authorized to 20% of the total common stock authorized, carries
"super-voting" powers. It is the Board's policy that up to 20% of the equity of
the Company's direct and indirect subsidiaries (except Holdings) may be
allocated to executive officers, directors and employees of the Company and its
subsidiaries in consideration of services rendered and to reward and motivate
executives."

      The foregoing may have anti-takeover effect and may be used to delay,
discourage or prevent a change in control of the Company.

      Pursuant to such policy, certain employees, including Messrs. Samuels,
Reese, Crowley and Cline, have been granted options to purchase Class B Common
Stock, at fair value as of the date of grant, of certain of the Company's
subsidiaries; such common stock, if issued, will have majority voting rights in
such subsidiaries.

The Company

      The Company has developed proprietary technologies for individualized
television programming ("Individualized Programming") and for Internet learning
systems ("eSchool"). The Company's products, in general, are tools for the
creation of programming that allows viewer participation for both television and
Internet platforms. The chief market presently targeted by the Company for its
Individualized Programming is in-home entertainment, particularly sports
programming, while for the Internet the Company's market focus is education,
with an emphasis on schools and universities in the United States.

      The Company operates directly and through wholly-owned subsidiaries. The
principal subsidiaries are ACTV Entertainment, Inc., which will be primarily
responsible for the Company's activities in the United States entertainment
market, its subsidiary, The Texas Individualized Television Network, Inc., which
will operate the Company's first individualized regional sports network, and
ACTV Net, Inc., which is responsible for the Company's Internet and education
business.

      The Company was incorporated under the laws of the State of Delaware on
July 24, 1989. The Company is the successor, by merger effective November 1,
1989, to ACTV, Inc., a California corporation, organized on July 11, 1983. The
Company's executive offices are located at 1270 Avenue of the Americas, New
York, New York 10020, telephone number (212) 262-2570.

Entertainment

      Individualized Programming significantly enhances the quality of most
varieties of television programming by giving the viewer the ability to make
instant and seamless changes within the live or pre-recorded television
programming being viewed. Individualized Programming is a multi-path broadcast
of several elements of programming material, such as instant replay, isolation
cameras, statistical data, or additional features. There is no limit to the
number of viewers who can interact simultaneously with a program enhanced with
the Company's Individualized Programming ("ACTV Program" or "ACTV Programming").

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      A viewer of Individualized Programming chooses among the various options
and features offered by using a remote control device with a minimum of four
keys programmed for ACTV functionality. These keys allow access to the
appropriate path to be selected. In a live hockey telecast, for example, the
Company's Individualized Programming allows a viewer to select features like
"Hit Parade," a recap of the game's hardest checks; "Saving Grace," a
compilation of the game's best saves; "Star Cam," which provides an isolated
view of a featured player; "Goals-On-Demand," a compilation of all the scores in
the contest; plus, the viewer can call up in-depth statistics and instant
replays at any time.

      Individualized Programming gives television advertisers unique
opportunities to target their message demographically. By asking the viewer
basic questions at the beginning of the program, the Individualized Programming
can recall this information during a commercial break and send the viewer an
appropriate advertisement. Alternatively, before a commercial break, viewers can
be asked the type of product for which they would like to see an advertisement.
The Company's Individualized Programming records this choice, then sends the
requested commercial to each viewer. This same choice can be recalled at a later
commercial break to provide additional information. Individualized Programming
stores the responses in the system memory, and can trigger branches based on the
accumulated responses at the end of the program, offering premiums, additional
information, or better targeted commercial messages to each viewer.

      The Company's initial emphasis is to deploy its programming over cable
systems that have upgraded their signal origination facilities (referred to in
the industry as "headends") for digital delivery. Operators of upgraded systems
will distribute the Company's Individualized Programming to viewers who have a
digital set-top terminal into which the Company's software application has been
downloaded. The Company is emphasizing digital delivery over analog primarily
because the channel capacity in digital transmission systems is greater and
because Individualized Programming can be integrated into digital systems with
no incremental hardware cost. The Company believes that the differentiation
afforded by the Company's Individualized Programming will allow distributors to
offer their customers Individualized Programming on a subscription basis.

      The Company, working with The Sarnoff Corporation ("Sarnoff"), a world
leader in the development of digital platforms, has developed software that
integrates the Company's Individualized Programming into digital set-top
terminals at no incremental manufacturing cost. The Company has completed the
integration of its Individualized Programming software into the MPEG-2 digital
set-top terminal manufactured by General Instrument Corporation ("GI").

      The Company is seeking to launch regionally-based entertainment networks
("Regional Networks"), featuring sports programming provided through the
Company's strategic alliance with FOX Sports Net.

      FOX Sports Net is a service of "National Sports Partners," a joint venture
between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks,
which is a 50/50 partnership between News Corp. and Tele-Communications, Inc.'s
Liberty Media Corporation. Equally owned by FOX/Liberty Networks and
Cablevision's Rainbow Media Holdings, Inc., the new venture now reaches more
than 58 million homes nationwide.

      The Company has the rights to license FOX Sports Net programming from each
of FOX Sports Net's regional sports affiliates and to offer enhanced FOX Sports
Net programming to any distributor that carries the corresponding regional FOX
Sports Net channel. The FOX Sports Net agreement extends through June 2003.

      The Company plans to launch its first Regional Network in 1998 in the
territory served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes

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programming to 5.1 million households in Texas, Louisiana, Arkansas, Oklahoma
and nine New Mexico counties. The Southwest Regional Network will feature
individualized telecasts of professional basketball (Houston Rockets, Dallas
Mavericks, San Antonio Spurs), hockey (Dallas Stars), and baseball (Texas
Rangers, Houston Astros), along with college sports events from the
Southeastern, Southland and Western Athletic conferences.

      The Company has entered into an agreement with Tele-Communications Inc.
("TCI"), under which TCI will initially distribute the Southwest Regional
Network to its digital subscribers in the Dallas, Texas area. The agreement also
contemplates distribution throughout the region served by FOX Sports Southwest,
with the potential for nationwide distribution by TCI of the Company's future
regional sports networks.

      The Company's plan is to produce and distribute entertainment programs
within each Regional Network from a master control facility in the region; the
facility will include the necessary production and transmission equipment to
both create and distribute Individualized Programming.

      For example, for the Southwest Regional Network the Company has
constructed a state-of-the-art master control in the facility used by FOX Sports
Southwest in Irving, Texas. During a live sports production, the Southwest
Regional Network's master control receives multiple video/audio feeds from Fox
Sports Southwest via fiber lines. The Company's production team creates and adds
individualized programming elements, digitally encodes the Individualized
Programming and distributes it via fiber to cable operators. The Company expects
also to offer satellite transmission of its Southwest Regional Network
programming.

Business Strategies

      Cable television is currently available for purchase by more than 90% of
the approximately 98 million U.S. television households. The cable television
industry is an established provider of multi-channel programming, with
subscriptions from approximately 65% of total U.S. television households. Cable
systems typically offer 25 to 78 channels of programming at an average monthly
subscription price of $35.

      The development of digital transmission and compression allows for the
transmission of a greater number of channels with better audio and video
quality. With digital compression technology, each 6MHz of bandwidth (the amount
required for an analog channel) can be converted on average into five or more
channels of programming, thereby enabling the distributor to offer a broader
variety of programming choices than analog systems.

      Once a cable operator has upgraded its headend for digital distribution, a
cable home needs only a digital set-top terminal with ACTV software to receive
Individualized Programming. GI has announced orders for approximately 15 million
digital set-top terminals to date.

      The Company's business strategies for the U.S. entertainment market are as
follows:

Target regions where the cable operators' headends are being upgraded to
digital. For the launch of Regional Networks, the Company has specifically
targeted certain regions of the United States where the Company believes a
greater proportion of cable operators are upgrading their headends and are
currently offering or have indicated they will soon be offering digital
converter boxes to their cable subscribers. The Southwest Regional Network is
the Company's first planned Regional Network.

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Negotiate and sign affiliate agreements with cable operators to offer Regional
Network programming to their subscribers. The Company has entered into an
agreement with TCI, under which TCI will initially distribute Southwest Regional
Network programming to its digital subscribers in the Dallas area. The agreement
also contemplates distribution throughout the region served by FOX Sports
Southwest, with the potential for nationwide distribution by TCI of the
Company's future Regional Networks. The Company is in discussions with a number
of other cable operators to sign affiliate agreements to carry the Southwest
Regional Network. The Company believes that its Regional Networks will provide
cable operators with uniquely differentiated programming that can help them
attract customers to their new digital services, as well as offer a potentially
significant source of new revenues.

Through a focused marketing effort, educate both cable operators and potential
subscribers about the benefits of Individualized Programming. The Company
believes that as cable operators become better educated about the benefits of
Individualized Programming and understand the additional revenues that can be
earned by providing it to their subscribers, the Company's revenues and
penetration rates will increase. As consumers and cable operators understand
that the Company can provide a significantly better way of viewing a sporting
event (as well as other types of traditional programming), the Company believes
its penetration rates will grow. Key marketing efforts will include: (1)
possibly offering Individualized Programming on a free trial basis to potential
new subscribers; (2) cross-promotional activities with FOX Sports Net; (3)
cross-promotional activities with cable operators and (4) traditional print
media, television advertising, and other marketing strategies.

Keep programming costs low during the Company's first few years of operation and
expand its penetration, through sports programming. The Company believes that
sports is the most popular programming genre for attracting new subscribers to
the Southwest Regional Network and to Individualized Programming in general. In
addition, a focus on sports programming by the Company is more cost-efficient
than a programming line-up with greater variety. Therefore, it is Company's
intention initially to keep programming costs low by primarily focusing on just
sports programming.

Individualized Programming

      The Company's process of creating Individualized Programming involves
viewer selection from a multiple number of frame-synchronized video, graphics,
and/or audio signals delivered at one time. Viewers see and/or hear only one of
the signals at a given moment; the others remain transparent. Each viewer
interacts with the programming individually by making selections or decisions
using a remote control device. In response to these keyed inputs, the
Individualized Programming seamlessly switches from one signal to another,
giving each viewer his or her appropriate response. The viewer cannot detect
when such a switch takes place because it occurs with frame accuracy.

      The results appear seamless and uninterrupted -- for the viewer the
programming is completely individualized. Although an individualized program and
its associated branches are taped in a normal linear fashion, the program, when
shown, has thousands of possible variations available for each viewer to
experience. The particular version seen is based on each viewer's individually
selected preferences and inputs. An unlimited number of independent viewers can
interact with an ACTV Program simultaneously.

      Individualized Programming can also be effectively employed for live
telecasts, particularly sports events such as those to be produced by the
Southwest Regional Network. For live events, Individualized Programming allows a
viewer to have a choice of simultaneous options like instant

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replay on demand, feature packages that are created and made available as the
event progresses, alternative camera angles and in-depth statistics.

      Individualized Programming allows a television set-top terminal to receive
information from codes either embedded into the video program material or
delivered in a data packet. It maintains "memory" on the progress of the viewer
and provides automatic branching. At appropriate times during the program, the
set-top will make branch switches automatically, accumulate data, recall
information, create graphics and/or implement a pre-programmed set of
instructions.

      In digital systems, multiple video, audio and graphics can be
individualized in 6MHz of band-width. The Company's software enables the
implementation of Individualized Programming into digital television systems.
Individualized Programming can be delivered through any digital video system and
received by a standard digital set-top terminal, such as GI's DCT 1000. The
Company's software application can be installed during the manufacturing process
or can be later downloaded into each set-top terminal. There is no additional
memory or hardware necessary to upgrade a digital set-top terminal to deliver
the Company's Individualized Programming to subscribers.

      Individualized Programming can be transmitted through any service
provider's channel, and can even be broadcast under the new digital television
standard recently approved by the FCC. Individualized Programming uses one 6MHz
channel with 64 OAM, or 8VSB modulation techniques providing adequate data rates
to support the Company's programming. Individualized Programming is channel
independent and can be transmitted over any 6MHz channel using any practical
modulation scheme. The content will be created in each of the Company's regional
production facilities and then distributed to operators throughout the region
via a number of different delivery options, including land lines and satellite.
The distribution method will be determined by the geographical nature of the
region and the economic viability of the different delivery techniques available
in each specific region. The Company delivers to the service provider a complete
MPEG-2 compatible transport stream containing all of the necessary information
for the application to run properly in its system.

      The Company's signal is received at the cable operator's distribution
facility by an appropriate receiver. The service provider will simply have to
pass the signal through its CA (Conditional Access) system and send the signal
out to its customers. Utilizing standard MPEG-2 compression techniques at a 4:1
compression ratio, the Company will provide its service through a single 6MHz
channel. The Company does not require any back channel capability to support the
programming. Individualized Programming creates an individualized look and feel
by using relational database management and a very small amount of local memory
in order to create millions of possible variations.

      The Company's application software uses approximately 25 Kilobytes of code
space, either ROM (Read Only Memory), PROM (Programmable Read Only Memory) or
EEPROM (Electrical Erasable PROM). The application requires a small amount of
scratch pad memory, RAM (Random Access Memory) up to 2KB. While the application
does not require any NVRAM (Non-Volatile RAM), up to 1KB of NVRAM is desirable
for future back channel applications.

      Individualized Programming seamlessly switches the user through multiple
channels of video and audio in response to the user's inputs throughout the
program. The switch may be delayed as long as the producer/writer chooses. The
seamless switch is accomplished by utilizing a subset of the MPEG-2 syntax for
splicing. Individualized Programming switching is much simpler than

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creating a seamless splice between two unrelated video streams because the video
and audio encoders are co-located.

      The Company's Individualized Programming employs a command language that
is used to configure the set-top converter and control the information that the
user sees under specific conditions. The command language requires a small
amount of additional bandwidth in the channel and approximately 2 Kilobytes/sec
of additional data must be sent in a digital system. When commands are received
by the application software running in the set-top converter, they are processed
by the software and the correct information is presented.

Education

      The Company has developed eSchool Online(TM) ("eSchool"), a Java-based
software suite that permits a teacher to use the Internet as an accompanying
instructional tool during a lesson. (Java is a programming language developed
for the Internet by Sun Microsystems.) eSchool integrates Web content and a chat
application with educational video effectively to create a "virtual" classroom.
eSchool software can be used for pre-recorded as well as live programming, while
the video can come from any source.

      With eSchool software, a student can receive a traditional video lesson
through a frame in his or her Web browser, or from a television in the
classroom. Simultaneously, eSchool provides separate frames in the Web browser
that display 1) Web sites with supporting information/examples; 2) dialogue with
teacher and/or other students during a live lesson; and 3) a "playlist" of Web
sites received to permit navigation from one to another. eSchool content
creation software allows an instructor to easily select and order the addresses
of the Web sites and related questions to be included in the playlist. The Web
site addresses and questions can be assigned times and sent automatically to
students during a pre-recorded program, or in a live lesson. The instructor can
trigger any Web site address or question to be sent to the students at any time.

      eSchool's components include instructor and student user software,
authoring software and database assessment software. The Company expects to
continue to refine and upgrade its eSchool software in the future. In addition,
the Company provides Internet content development assistance, hosting of eSchool
programs on its computer servers, and consulting to schools and universities.

      The Company recorded its first eSchool sale in mid-1997 with the School
District of Philadelphia. The Philadelphia City Schools are using eSchool to
create and deliver new instructional and staff development programs. Since that
time, the Company has entered into contracts to deliver eSchool to educational
institutions in Nebraska, New York, Massachusetts, and Georgia.

      The Company has also developed two-way analog and digital programming
technologies for distance learning. The Company offers a point-to-multipoint
broadcast system that can deliver pre-recorded individualized lessons or can
integrate individualized segments into live distance learning lessons. Students
receive individualized responses to their input made with a simple remote
control. At the end of the lesson, the system's memory component can recall each
student's performance throughout the lesson, giving the local facilitator a
detailed accounting of the results.

      Distance learning ("DL") networks typically involve a teacher at a central
telecasting site distributing a lesson to multiple remote classroom sites. The
Company's individualized DL tools allow the teacher to create questions or offer
choices relating to the lesson and pre-record individualized responses. At
selected points in the lesson, the DL teacher can initiate the questions

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and interactions, with each student across the network receiving individualized
responses. In addition, the teacher receives immediate feedback on the classes'
responses, allowing the teacher to pace the lesson accordingly.

      The major components of the Company's DL television product are authoring
software, which permits the development of individualized education programming,
and hardware installed at the receiving site, which connects the student to the
system. The authoring software is designed to enable the teacher, using a
standard personal computer, video camera and other standard ancillary hardware
to produce the lessons to be telecast. The Company provides training and support
in the use of the authoring software, so that programming can be produced by the
customer in its own facilities.

      The Company has an agreement with GI to allow its individualized distance
learning functionality to be integrated with GI's DigiCipher(R) and Magnitude
systems. The new systems will allow programming networks to develop
individualized programming and distribute it digitally to their customers.

Business Strategies

      A recent independent survey found that approximately 70% of public schools
in the U.S. currently have Internet access, up from approximately 30% one year
ago. According to the survey, the number of computers used for instructional
purposes rose approximately 24%, to over 6 million during the 1996-97 school
year.

      Statistics show that the nation's 85,000 public schools are nearing the
U.S. Department of Education's recommended ratio of five students per computer.
The current ratio is 7.3 students per computer, compared to 19.2 to one just
five years ago.

      Education industry observers expect that spending for educational
technology infrastructure will continue to increase substantially for each of
the next several years. The wiring of the country's classrooms for Internet
connectivity is an established priority of the United States Government. The
Federal Communications Commission has mandated a $2.25 billion Internet subsidy
fund (of which $675 million was funded in 1997), and has chartered a
not-for-profit corporation, Schools and Libraries Corp., to administer it.
Public schools and libraries in the United States can use the fund for Internet
connection charges, internal wiring, and Internet network hardware (excluding
computers). Funding is from telecommunications companies, who are required by
the Telecommunications Act of 1996 to make yearly payments to the fund.

      Thus far, schools that are connected to the Internet have principally used
it for research purposes, rather than as a tool for the delivery of on-line
learning. The growth of the Internet itself and of school connectivity have
outpaced both the training of teachers on the Internet's functionality and the
availability of on-line curriculum. As a result, it is expected that school
spending for Internet teacher training and on-line learning will show marked
growth in the future. The on-line learning industry is widely reported as
growing at 100% per year, while industry experts predict that the total on-line
learning market may reach $3 billion by the year 2000.

      The Company's education business strategies are as follows:

Focus on Internet teacher training and on-line curriculum development. The
Company has developed and adapted eSchool to target on-line learning curriculum
development. To date, the Company's eSchool contracts with schools and
universities have all included, in addition to the

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provision of eSchool application and database management software, Internet
educational content development jointly by the Company and its clients. A
significant focus of such content development has been the creation of on-line
lessons for teacher training.

Create joint ventures with customers to market the customer's content to other
users. The educational programming developed by customers using the Company's
education products in many instances has application for others. The Company
intends, jointly with customers who develop programs, to market such programs to
other potential users.

Develop proprietary programming content. The Company believes that programming
content can be developed that will have application for many existing and
potential clients. The Company intends to develop such programming content
either entirely itself or by acquiring rights to existing education content and
subsequently adapting it for Internet application.

Government Regulation

      The Company believes that neither its planned implementation of
Individualized Programming nor eSchool is subject to any substantial government
regulation. However, the broadcast industry in general, and cable television in
particular, are subject to substantial government regulation.

      Pursuant to an Act of Congress passed in 1992 ("1992 Cable Act"), the
Federal Communications Commission ("FCC") substantially re-regulated the cable
television industry in various areas including rate regulation, competitive
access to programming, "must carry," and retransmission consent for broadcast
stations. These rules, among other things, restrict the extent to which a cable
system may profit from, or recover costs associated with, adding new program
channels, impose certain carriage requirements with respect to television
broadcast stations, limit exclusivity provisions in programming contracts and
require prior notice for channel additions, deletions and changes. The United
States Congress and the FCC also have under consideration, and may in the future
adopt new laws, regulations and policies regarding a wide variety of matters
which could, directly or indirectly, materially adversely affect the operations
of the Company.

Set-Top Converters, Terminals, and Other Devices

      The Company does not intend to manufacture set-top converters, terminals,
video servers, or other devices that provide Individualized Programming. This
equipment will be supplied to the Company pursuant to agreements between the
Company and equipment suppliers.

      In 1996, the Company and GI signed a non-exclusive, royalty-free
manufacturing agreement for GI's MPEG-2 digital set-top terminal. Working with
the Company and GI, Sarnoff has facilitated the integration of Individualized
Programming into this terminal. In August 1997, GI invested $1 million in the
common stock of the ACTV, Inc. (the "Common Stock"). The companies also agreed
to jointly market the Company's individualized television application that
operates with GI's current generation digital systems and consumer set-top
terminals.

      The Company intends to grant licenses similar to that granted to GI to
other manufacturers that are selected by the future distributors of
Individualized Programming. ACTV does not anticipate deploying its programming
service with other digital set-top box manufacturers until early 1999.

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      In the education market, the Company has entered into an arrangement with
GI pursuant to which its individualized functionality for distance learning will
be integrated with GI's DigiCipher and Magnitude systems. The new digital
systems will allow programming networks to develop the individualized content
and distribute it digitally to their customers.

      The Company has a non-exclusive agreement with KDI Precision Products,
Inc. ("KDI") to manufacture the Company's distance learning systems that
incorporate individualized functionality. KDI sells the systems to the Company
at prices, and in accordance with a delivery schedule, agreed upon from time to
time. KDI also is a distributor of components such as television monitors, VCRs,
remote controls, printers and cabinets used in conjunction with the systems.

      KDI is currently the only manufacturer of the distance learning systems.
The Company believes that KDI can produce sufficient systems to meet the
anticipated needs of the Company in the education marketplace. In the event that
KDI were unable to supply the systems, there can be no assurance that the
Company could produce sufficient systems or obtain sufficient systems from
another manufacturer at an acceptable price. The inability of the Company to
obtain systems could have a material adverse effect on the distance learning
business of the Company.

      There can be no assurance that the Company will be successful in
developing additional manufacturing licenses.

Patents and Other Intellectual Property

      The Company has sought to protect the proprietary features of its
Individualized Programming it employs through patents, copyrights,
confidentiality agreements, and trade secrets both in the United States and
overseas. As of the present time, the United States Patent and Trademark Office
has issued fifteen patents, with additional patents pending. The patents, which
deal with different aspects of Individualized Programming, expire at various
dates from 1998 to 2015.

      Corresponding patents for some of the above U.S. patents have been granted
or are pending in Canada, Japan, Australia and the European Patent Office. When
a patent is granted by the European Patent Office, and upon the filing of
appropriate translations, protection will be available in the designated
European countries. The Company believes such patents will strengthen its
competitive position in the aforementioned countries.

      The inventors named on all of the patents issued have assigned to the
Company all right, title, and interest in and to the above U.S. patents and any
corresponding foreign patents or applications based thereon. In addition, Dr.
Michael Freeman, the principal inventor of Individualized Programming and a
current employee of the Company, has agreed to assign to the Company the rights
and title in and to all future patents and applications, and any corresponding
foreign patents or application relating to the Individualized Programming.

      There can be no assurance that the patents held by the Company are
enforceable, particularly in view of the high cost of patent litigation, nor can
there be any assurance that the Company will derive any competitive advantages
from them. To the extent that patents are not issued for any other products
developed by the Company, the Company would be subject to more competition. The
issuance of patents may be insufficient to prevent competitors from essentially
duplicating the Company's products by designing around the patented aspects. In
addition, there can be no assurance that the Company's products will not
infringe on patents owned by others, licenses to which may not be available to
the Company, nor that competitors will not develop functionally similar products
outside the protection of any patents the Company has or may obtain.

                                       11
<PAGE>

      The Company requires each of its employees, consultants and advisors to
execute a confidentiality and assignment of proprietary rights agreement upon
the commencement of employment or a consulting relationship with the Company.
These arrangements generally provide that all inventions, ideas, and
improvements made or conceived by the individual arising out of the employment
or consulting relationship shall be the exclusive property of the Company. This
information shall be kept confidential and not disclosed to third parties,
except by consent of the Company or in other specified circumstances. There can
be no assurance, however, that these agreements will provide effective
protection for the Company's proprietary information in the event of
unauthorized use or disclosure of such information.

Product Development

      The Company's current research and development efforts for the
entertainment market are focused primarily on digital application of its
Individualized Programming. The Company has worked with Sarnoff to develop
digital applications of its Individualized Programming. The Company, Sarnoff,
and General Instrument Corp. have completed the project to incorporate the
Company's Individualized Programming into GI's MPEG-2 digital set-top cable
terminal. The Company is also in the process of expanding and further refining
its Individualized Programming to incorporate additional functionalities that
can be used in the digital cable platform and to adapt its application software
for use in digital converters manufactured by other companies.

      For the education market, the Company plans to continue to refine and
upgrade its eSchool software programs.

Competition

      The business of providing subscription and pay television programming is
highly competitive. The Company faces competition from numerous other companies
offering video, audio and data products and services. The Company's existing and
potential competitors comprise a broad range of entities engaged in
communications and entertainment, including cable programming providers, cable
premium pay programming providers (such as HBO, Cinemax etc.), premier multiplex
pay channels under the digital format, pay-per-view movies and special event
offerings, television networks, home video products companies, as well as
companies developing new technologies and programming concepts. Many of the
Company's competitors have greater financial, marketing and programming
resources than the Company. The Company expects that quality, uniqueness and
variety of programming, quality of picture and service and cost will be the key
bases of competition. The Company may also experience competition from other
programming alternatives that may provide new sources of revenue to cable
operators.

      At the present time, there are a number of different new television
technologies, often labeled as interactive television, that have been developed
or are under development by others that might be considered competitive with the
Company's Individualized Programming. These new technologies, in general, are
delivered via cable television, or through devices that are attached to the
television set. To the best of the Company's knowledge, none of the
point-to-multipoint systems based on these technologies allows the viewer to
affect what is seen on the television in the same manner or to the extent of
Individualized Programming, which is unique in its approach and function.

      In education, the market for Internet products and services is one
characterized by rapid technological change and heavy competition from firms
with a wide range of size and resources. The

                                       12
<PAGE>

Company also competes with providers of traditional education products; nearly
all of such companies have greater financial, and other, resources than the
Company.

Employees

      At December 31, 1997, the Company employed 33 full-time employees. The
Company believes that its relationships with its employees are generally
satisfactory.

Item 2.     PROPERTY - OFFICES AND FACILITIES

      The Company maintains its principal and executive offices at Rockefeller
Center, 1270 Avenue of the Americas, New York, New York, where it leases
approximately 8,000 square feet at a rent of approximately $22,200 per month
pursuant to a lease that expires in January 2001. The Company maintains an
engineering staff and an editing studio at 1600 Broadway, New York, New York,
where it leases approximately 2,500 square feet at a rent of $3,450 per month,
pursuant to a lease that expires in December 1999. In addition, the Company
leases a facility in Dallas of 2,972 square feet for a monthly rent of
approximately $5,950, pursuant to a lease that expires in October 1998, and
maintains an office at 9454 Wilshire Boulevard, Beverly Hills, California, which
is leased on a month-to-month basis for approximately $1,350 per month. The
Company believes its current facilities are suitable and adequate, and that they
provide the productive capacity necessary for the performance of the operations
of the Company. None of the Company's properties is leased from affiliated
persons.

Item 3.     LEGAL PROCEEDINGS

      There are no pending material legal proceedings to which the Company is a
party.


Item 4.     SUBMISSION OF MATTERS TO A
            VOTE OF SECURITY HOLDERS

On May 16, 1997 the Company held an Annual Meeting of Shareholders for which it
solicited votes by proxy. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against, and the number of abstentions as to each matter.

                                       13
<PAGE>

1.   Election of directors:
                           For       Withheld
     Bruce Crowley     11,032,580    149,495
     Richard Hyman     10,866,478    315,597
     Jess Ravich       11,034,780    147,295

2.   To approve an amendment to the Company's Restated Certificate of
     Incorporation that would increase the authorized shares of the Company's
     Common Stock to 65,000,000.

        For          Against        Abstain
     10,341,965       794,355        45,755

3.   To approve an amendment to the Company's Restated Certificate of
     Incorporation that would convert Series A and Series B Convertible
     Preferred Stock into 1,000,000 shares of preferred stock without
     designations.

        For          Against        Abstain
     6,219,526       651,722        74,675

4.   To ratify appointment of Deloitte & Touche, LLP as independent auditors of
     the Company.

        For          Against        Abstain
     11,103,450       46,925         31,700


                                       14
<PAGE>


PART II

Item 5.     MARKET FOR THE REGISTRANT'S COMMON
            EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock is traded on The Nasdaq Stock Market ("Nasdaq")
and the Boston Stock Exchange under the symbols "IATV" and "IAT", respectively.
The following table sets forth the high and low sale prices for Common Stock as
reported by Nasdaq.

                           Common Stock

1997 Quarter               High       Low
                         --------------------

  First                     3 3/4     2 1/16
  Second                    2 1/4     1 7/16
  Third                     1 15/16   1 11/32
  Fourth                    2 1/32    1 5/16

1996 Quarter               High       Low
                         --------------------

  First                     5 1/8     3 11/16
  Second                    4 9/16    3 1/2
  Third                     4 5/16    3 1/16
  Fourth                    3 27/32   2 11/16

On March 25, 1998, there were approximately 300 holders of record of the
Company's 16,904,024 outstanding shares of Common Stock.

On March 24, 1998, the closing bid and asked prices of the Common Stock as
reported by Nasdaq were $1 19/32 and $1 11/16, respectively.

The Company has not paid cash dividends since its organization. The Company
plans to use earnings, if any, to fund growth and does not anticipate the
declaration or the payment of cash dividends in the foreseeable future.


                                       15
<PAGE>



Item 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                     ------------------------------------------------------------------------------
                                                         1993            1994             1995             1996              1997
                                                     ----------       ---------        ---------        ---------         ---------
<S>                                                  <C>             <C>             <C>              <C>               <C>
Statement of Operations:

Revenues(1)                                          $  164,602      $  938,416      $ 1,311,860      $ 1,476,329       $ 1,650,955
Operating Expenses(1)                                 3,443,513       5,734,132        8,272,884       10,240,158         9,120,267
Equity in Net Loss of
ACTV Interactive(2)                                     506,303         143,500               --               --                --
Loss Before Extraordinary Item(3)                     4,156,955       5,122,010        6,920,906        8,605,097         7,352,441
Net Loss(3)                                           4,156,955       4,465,240        6,826,789        8,605,097         7,352,441
Loss Applicable to Common Stock Shareholders          4,156,955       4,465,240        6,826,789        8,800,481         7,858,683
Weighted Average Shares Outstanding                   5,800,134       7,897,278       10,162,128       11,739,768        12,883,848
Loss Per Common Share Before Extraordinary Item(3)          .72             .65              .68              .75               .61
Net Loss Per Common Share(3)                                .72             .57              .67              .75               .61

Balance Sheet Data:                                    12/31/93        12/31/94         12/31/95         12/31/96          12/31/97
                                                     ----------       ---------        ---------        ---------         ---------

Working Capital                                       2,263,225       1,503,703        2,397,027        5,093,859        (1,082,097)
Total Assets                                          5,920,720       7,733,314        8,551,128       11,692,624         7,901,918
Long Term Obligations                                 2,220,794       2,325,061               --               --                --
Stockholders' Equity(4)                               1,910,603       3,972,543        6,893,853        9,201,068         5,416,290
Total Capitalization                                  4,131,397       6,297,604        6,893,853        9,201,068         5,416,290
</TABLE>

(1)   For the period between January 1, 1993, and March 11, 1994, all education
      sales and expenses were reported separately by the Company's 49%
      affiliate, ACTV Interactive, and were not consolidated with the Company's
      statements of operations. For the remainder of 1994, operational results
      related to education were included with those of the Company, as a result
      of the Company's March 11, 1994 purchase of the Washington Post Company's
      51% interest in ACTV Interactive.

(2)   The results of ACTV Interactive are accounted for under the equity method
      of accounting for 1993 and for the period January 1, 1994 to March 11,
      1994.

(3)   Includes for the year ended 12/31/94 an extraordinary gain of $656,770,
      ($.08 per share) related to the extinguishment of debt and equipment lease
      obligations. Includes for the year ended 12/31/95 an extraordinary gain of
      $94,117 ($.01 per share) related to the extinguishment of debt
      obligations.

(4)   No cash or non-cash dividends on Common Stock have been paid or granted
      and the Company does not anticipate the declaration or payment of
      dividends on Common Stock in the foreseeable future.


                                       16
<PAGE>



Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

      To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, the successful and timely development and acceptance of
new products and markets and the availability of sufficient funding to effect
such product and/or market development.

      ACTV, Inc. ("the Company") has developed proprietary technologies for
individualized television programming ("Individualized Programming") and for
Internet learning systems ("eSchool"). The Company's products, in general, are
tools for the creation of programming that allows viewer participation for both
television and Internet platforms. The chief market presently targeted by the
Company for its Individualized Programming is in-home entertainment,
particularly sports programming, while for the Internet the market focus is
education, with an emphasis on schools and universities in the United States.

      For entertainment applications, the Company's Individualized Programming
gives the viewer the ability to make instant and seamless changes within the
live or pre-recorded television programming being viewed. Individualized
Programming is a multi-path broadcast of several elements of programming
material, such as instant replay, isolation cameras, statistical data, or
additional features. There is no limit to the number of viewers who can interact
simultaneously with a program enhanced with the Company's Individualized
Programming ("ACTV Program" or "ACTV Programming").

      For education applications, the Company has developed eSchool Online(TM)
("eSchool"), a Java-based software suite that permits a teacher to use the
Internet as an accompanying instructional tool during a lesson. (Java is a
programming language developed for the Internet by Sun Microsystems.) eSchool
integrates Web content and a chat application with educational video effectively
to create a "virtual" classroom. In addition, the Company markets analog and
digital systems for televised distance learning applications that permit
point-to-multi-point telecasts that can deliver pre-recorded individualized
lessons as well as integrate individualized lessons into live distance learning
class sessions.

      Since its inception, the Company has incurred operating losses
approximating $47 million related directly to the development and marketing of
the Individualized Programming and eSchool.

      The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regionally based entertainment networks
("Regional Networks"). Programming for the Regional Networks is provided through
the Company's strategic alliance with FOX Sports Net. The Company has the rights
to license FOX Sports Net programming from each of FOX Sports Net's regional
sports affiliates and to offer enhanced FOX Sports Net programming to any
distributor that carries the corresponding regional FOX Sports Net channel. The
FOX Sports Net agreement extends through June 2003.

      FOX Sports Net is a service of "National Sports Partners," a joint venture
between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks,
which is a 50/50

                                       17
<PAGE>

partnership between News Corp. and Tele-Communications Inc.'s Liberty Media
Corporation. Equally owned by FOX/Liberty Networks and Cablevision's Rainbow
Media Holdings, Inc., the new venture now reaches more than 58 million homes
nationwide.

      The Company's business plan is to develop Regional Networks in regions
served by Fox Sports Net, with distribution to be provided by cable operators
that are currently upgrading their service from analog to digital transmission.
Initially, the Regional Networks will feature sports programming, with the
possible introduction of other types of programming in the future. The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers Individualized
Programming on a subscription basis.

      The Company plans to launch its first Regional Network in 1998 in the
regions served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes programming to 5.1 million households in Texas,
Louisiana, Arkansas, Oklahoma and nine New Mexico counties. The Southwest
Regional Network will feature individualized telecasts of professional
basketball (Houston Rockets, Dallas Mavericks, San Antonio Spurs), hockey
(Dallas Stars), and baseball (Texas Rangers, Houston Astros), along with college
sports events from the Soutneastern, Southland and Western Athletic conferences.

      The Company has entered into an agreement with Tele-Communications Inc.
("TCI") under which TCI will distribute and market the Southwest Regional
Network to its digital subscribers in Texas. The agreement also contemplates
potential nationwide distribution by TCI of the Company's regional sports
networks.

      The Company also plans to launch additional individualized networks in
regions served by FOX Sports Net. The planned Regional Networks will feature FOX
Sports Net regional programming enhanced by the Company's Individualized
Programming. The Company will be responsible for the incremental content,
transmission, delivery and master control costs incurred in connection with the
product enhancement of the Individualized Programming to be presented through
its Regional Networks.

      In August 1997, General Instrument Corp. ("GI") invested $1 million in
common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly
with the Company, Individualized Programming applications. GI is the leading
supplier of digital television headend systems and digital set-top terminals.
The Company and GI had previously announced that the Company's Individualized
Programming would be incorporated into GI's new MPEG-2 digital set-top cable and
wireless terminals.

      It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998. However, there is no assurance that it will
secure the funding necessary to effect additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.

      The projected Southwest Regional Network and additional network expansion
are part of the Company's plan to develop the entertainment division of its
business, which to date, does not generate any revenue for the Company. There
can be no assurance that the Southwest Regional Network or other Regional
Networks, if launched, will generate significant revenues for the Company.

      The target market for the Company's education products includes schools,
state and local agencies, universities and private business. eSchool consists of
a suite of integrated software

                                       18
<PAGE>

products, including content creation software, student and teacher user
software, and database assessment software. In addition, the Company provides
Internet content development assistance, hosting of eSchool programs on its
computer servers, and consulting to schools and universities.

      To date, nearly all of the Company's revenues have been derived from sales
to the education market of eSchool and individualized educational programs and
products. There is no assurance that the Company will be able to successfully
compete in this market, where many of its current and potential competitors are
companies with significantly greater resources than those of the Company.

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 1996 and December 31, 1997

      During the year ended December 31, 1997 ("Fiscal 1997"), the Company's
revenues increased 12%, to $1,650,955, from $1,476,329 for the year ended
December 31, 1996 ("Fiscal 1996"). All revenues during Fiscal 1997 were derived
from the education market, while in Fiscal 1996, the Company's revenues derived
from education sales as well as from license and executive producer fees. The
revenue increase in the more recent period was the result of the inclusion of
sales from eSchool, which was introduced during Fiscal 1997, and higher sales of
distance learning products and services when compared to Fiscal 1996.

      Cost of sales decreased 27% in Fiscal 1997, to $471,956 , from $647,488 in
Fiscal 1996, and cost of sales as a percentage of sales revenue decreased to 29%
in the more recent year, from 44% in 1996. The relatively lower cost of sales in
Fiscal 1997 was due to a greater proportion of educational programming revenues
and the inclusion of eSchool sales in 1997. Both eSchool and educational
programming have higher gross margins than the Company's other sources of
revenue.

      Total expenses excluding cost of sales and interest expense in Fiscal 1997
decreased 10%, to $8,648,310, from $9,592,670 in the comparable period in 1996.
The decrease was partially attributable to lower operating expenses and
depreciation and amortization expense in the more recent period, which more than
offset an increase in selling and administrative expense. Also, the Company
recorded a gain of $346,892 in Fiscal 1997, compared to an expense of $183,634
related to stock appreciation rights. The difference was the result of a lower
market price for the Company's Common Stock at the end of Fiscal 1997, when
compared to the end of Fiscal 1996. Finally, during Fiscal 1996 the Company
incurred a valuation allowance of $274,325 related to an investment in an
affiliated company and, as a component of Fiscal 1996 selling and administrative
expense, reserved $82,746 against license fee and production service receivables
from this affiliate. During Fiscal 1997, the Company incurred no valuation
allowance.

      In Fiscal 1997, direct expenses related to the entertainment and education
markets were approximately $2.7 million and $2.9 million, respectively.

      Depreciation and amortization expense for Fiscal 1997 decreased 11%, to
$754,053, from $846,351 for Fiscal 1996. This decrease was due primarily to the
recognition during Fiscal 1996 of amortization expense for programming assets
that were fully amortized during that year.

      The Company's had no interest expense for either Fiscal 1997 or Fiscal
1996. Interest income for Fiscal 1997 decreased 26%, to $116,870, compared with
$158,732 in Fiscal 1996. The decrease resulted from lower available average cash
balances in the more recent year.

                                       19
<PAGE>

      For the Fiscal 1997 and 1996, the Company paid and/or accrued $506,242 and
$195,384, respectively, for dividends on convertible preferred stock issuances.
All dividend payments were made in the Company's Common Stock. The increase
during Fiscal 1997 is the result of the Company's having preferred stock
outstanding for less than half of the year during Fiscal 1996.

      For Fiscal 1997, the Company's net loss applicable to common shareholders
was $7,858,683, or $.61 per share, a decrease of 11% over the net loss of
$8,800,481 or $.75 per share, incurred in Fiscal 1996. The decrease in net loss
was due principally to higher gross margins, lower operating expenses, and lower
depreciation and amortization and stock appreciation rights expenses during the
more recent year.

Comparison of the Years Ended December 31, 1995 and December 31, 1996

      During the year ended December 31, 1996 ("Fiscal 1996"), the Company's
revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended
December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly
higher education revenues from distance learning and the recognition of
production revenues in the more recent period (compared to no production
revenues in 1995), which more than offset a small decline in non-distance
learning education sales.

      Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in
Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44%
in the more recent year, from 25% in 1995. The relatively higher cost of sales
in Fiscal 1996 was due to a greater proportion of total revenues generated from
lower margin equipment products and production services, as compared to Fiscal
1995's sales mix.

      Total expenses excluding cost of sales and interest expense in Fiscal 1996
increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995.
The increase was attributable to higher operating expenses (principally
resulting from the Company's regional individualized network trial in Southern
California), greater research and development expenditures, higher selling and
administrative expenses, and a valuation allowance of $274,325 for the full
amount of the Company's investment in The Greenwich Group. As a component of
Fiscal 1996 selling and administrative expenses the Company also reserved
$82,746 against license fee and production service receivables from The
Greenwich Group. The Greenwich Group has experienced difficulty in raising
sufficient capital to fund its operations and growth and has been unable to pay
the Company for its services and license.

      In Fiscal 1996, direct expenses related to the entertainment and education
markets were approximately $2.5 million and $2.6 million, respectively.

      Depreciation and amortization expense for Fiscal 1996, decreased 24%, to
$846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to
the relatively higher depreciation expense incurred in Fiscal 1995 that related
to set-top converters purchased for the California trial.

      The Company's interest expense for Fiscal 1996, decreased to zero,
compared to $98,392 in the prior year. The decrease was due to the repayment of
in full of the Company's debt obligations during 1995. Interest income for
Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995.
The increase resulted from higher available average cash balances in the more
recent year.

                                       20
<PAGE>

      For the year ended December 31, 1996, the Company accrued $195,384 for the
payment of dividends to holders of convertible preferred stock issued in August
1996 by one of its wholly-owned subsidiaries.

      For Fiscal 1996, the Company's net loss applicable to common shareholders
was $8,800,481 or $.75 per share, an increase of 29% over the net loss of
$6,826,789 or $.67 per share, incurred in Fiscal 1995. Included in the Fiscal
1995 net loss is an extraordinary gain of $94,117, or $.01 per share as the
result of the extinguishment of certain obligations for value that was less than
the amounts recorded on the Company's books for such obligations. The increase
in net loss was due to increased operating, selling and administrative expenses
and lower operating margins during the more recent year, as noted above.

Liquidity and Capital Resources

      Since its inception, the Company (including its operating subsidiaries)
has not generated revenues sufficient to fund its operations, and has incurred
operating losses. Through December 31, 1997, the Company had an accumulated
deficit of approximately $47 million. The Company's cash position on December
31, 1997, was $554,077, compared to $6,520,756 on December 31, 1996.

      During the year ended December 31, 1997, the Company used $6,603,499 in
cash for its operations, compared with $7,560,486 for the year ended December
31, 1996. The decrease in the more recent year was due to lower operating
expenses and higher gross margins, which more than offset higher selling and
administrative expenses. The Company met its cash needs in the year ended
December 31, 1997 from a series of private placements of Common Stock
(approximately $1.5 million in net proceeds, including the $1 million placement
with GI) and Series A Convertible Preferred Stock (approximately $2.0 million in
net proceeds). The Company met its cash needs in the year ended December 31,
1996 from the proceeds of a private placement of Common Stock ($1.9 million in
net proceeds) and of convertible preferred stock issued by its wholly-owned
subsidiary ($9.1 million in net proceeds).

      With respect to investing activities in the year ended December 31, 1997,
the Company used cash of $2,895,803, related principally to the purchase of
equipment for a television master control facility in Dallas, Texas and for the
systems development related to the incorporation of Individualized Programming
into the GI cable set-top terminal and to eSchool. During the year ended
December 31, 1996, the Company used cash of $444,189 related to the purchase of
television production equipment and office improvements.

      All of the Company's operating subsidiaries have been dependent on
advances from the Company to meet their obligations. The Company's subsidiary,
The Texas Individualized Television Network, Inc., raised funds directly for its
operations in January 1998 and expects to fund its operations for the forseeable
future from the proceeds of this financing (see description below). During the
year ended December 31, 1997, the Company advanced approximately $2.6 million to
ACTV Net, $3 million to The Texas Individualized Television Network, Inc., and
$2 million to ACTV Entertainment, Inc. and its other subsidiaries.

      Advances are based upon budgeted expenses and revenues for each respective
subsidiary. Adjustments are made during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.

      As compared to the Company's balance sheet as of December 31, 1996, the
Company's balance sheet as of December 31, 1997, reflects an increase of
$408,085 in preferred dividends

                                       21
<PAGE>

payable, resulting from the issuance of additional convertible preferred stock
during 1997 and the payment of dividends in kind rather than in cash.

      In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc.,
(the "Issuer") and The Texas Individualized Television Network, Inc., a
wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note
Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain
private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.

      In connection with the purchase of such note, the Purchasers received on
January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas
Network that grants the Purchasers the right to purchase up to 17.5% of the
fully-diluted shares of common stock of Texas Network. The Warrant expires on
June 30, 2003. The Warrant also grants the Purchasers the right, through July
14, 1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.

      Prior to June 30, 1998, should the Company form and capitalize an entity
with the intent to commence operations for a second Regional Network in one of
the ten FOX Sports Net owned and operated regions, the Purchasers have a one
time option to purchase notes from such entity on the same terms and conditions
as the Texas Network financing.

      During the first three months of 1998, the Company has raised a total of
$1.4 million from a series of private placements of its Common Stock.

      In January 1998, the Company entered into an agreement with certain
holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of
ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement
provides that the Company, at its sole discretion, may purchase from certain
holders of the Preferred Shares up to an aggregate of 150,000 Preferred Shares
based on a predetermined schedule through June 30, 1998. If the Company chooses
to purchase the Preferred Shares, the Company may, at its sole discretion, pay
in cash or a combination of cash, the Company's Common Stock, and warrants to
purchase the Common Stock.

      Management of the Company believes that its current funds (taking into
account the approximately $6.4 million raised during the first three months of
1998) will enable the Company to finance its entertainment and corporate
operations at their present level for at least the next twelve months. Such
belief is based on assumptions that could prove to be incorrect, in which case
the Company may require additional capital to finance such operations during
this period. In addition, if the Company is not successful at raising additional
funds, it may be required to significantly reduce its education operations.
While the Company believes that it has adequate funds to launch and operate its
planned Southwest Regional Network, it will need additional funding for Regional
Network expansion. While the Company has engaged an investment bank for
assistance in securing such financing, the Company has no commitments from
lenders or investors at this time and there is no assurance that it will be able
to raise the necessary capital to effect additional Regional Network

                                       22
<PAGE>

launches or to maintain its education operations at current levels. Such belief
is based on assumptions that could prove to be incorrect, in which case the
Company may require additional financing during this period.

      The Company does not have any material contractual commitments for capital
expenditures, although the Company believes that the Southwest Regional Network
may need to acquire approximately $750,000 in equipment for a second master
control facility.


Impact of Inflation

      Inflation has not had any significant effect on the Company's operating
costs.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 130.

      SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1998. The Company has determined that the adoption
of this statement will have no effect on the financial statements.

Statement of Financial Accounting Standards No. 131.

The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1997. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements are listed under Item 14 in this report.

Item 9.     DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None.

PART III

Item 10.    MANAGEMENT

                                       23
<PAGE>

Executive Officers and Directors

      The Company intends to file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year covered by this Report on Form
10-K a definitive proxy statement (the "Proxy Statement"), pursuant to
Regulation 14A pertaining to the Annual Meeting of Stockholders to be held in
June 1998. Information regarding directors and executive officers of the Company
will appear under the caption "Election of Directors" in the Proxy Statement and
is incorporated herein by reference.

Item 11.    EXECUTIVE COMPENSATION

      Information regarding executive compensation will appear under the caption
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN
            BENEFICIAL OWNERS AND MANAGEMENT

      Information regarding security ownership of certain beneficial owners and
management will appear under the caption "Ownership of Securities" in the Proxy
Statement and is incorporated herein by reference.

Item 13.    CERTAIN TRANSACTIONS

      Information regarding certain transactions will appear under the caption
"Certain Transactions" in the Proxy Statement and is incorporated herein by
reference.

PART IV

Item 14.    FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND
            REPORTS ON FORM 8-K:


(a)1. FINANCIAL STATEMENTS:

See the Consolidated Financial Statements beginning on Page F-1 hereafter, which
is incorporated by reference.

(a)2. FINANCIAL STATEMENT SCHEDULE

The following Financial Statement Schedule for the years ended December 31, 1997
and December 31, 1996 is filed as part of this Annual Report. The Company had no
activity reportable on this schedule for the year ended December 31, 1995.


                                       24
<PAGE>


Schedule II - Valuation and Qualifying Accounts and Reserves

                        Column B         Column C           Column D    Column E
                      ----------  ----------------------  ----------  ----------
                      Balance at  Charged to  Charged to              Balance at
                       Beginning   Costs and       Other  Deductions         End
Description            of Period    Expenses    Accounts   -Describe   of Period
--------------------------------------------------------------------------------

  Year ended 12/31/96:

Accounts receivable
allowance for doubtful
accounts.......                      $82,746                             $82,746

Reserve for investment
losses.........                     $274,325                            $274,325

  Year ended 12/31/97:

Accounts receivable
allowance for doubtful
accounts                 $82,746     $43,188     XXXXXXX     $82,746     $43,188

Reserve for investment
losses.........         $274,325                            $274,325          --


During 1997, the balances of $82,746 for accounts receivable allowance and
$274,325 for investment loss reserve were written off as uncollectible and
unrecoverable, respectively.


                                       25
<PAGE>


(a)3. EXHIBITS (inapplicable items omitted):

3.1.a    Restated Certificate of Incorporation of the Company.*
3.1.b    Amendment to Certificate of Incorporation of the Company.**
3.2      By-Laws of the Company.*
9.1      Voting Agreement dated November 11, 1994, by and between William C.
         Samuels and Michael J. Freeman.***
9.2      Voting Trust Agreement dated March 10, 1994 by and among William C.
         Samuels, The Washington Post Company and ACTV, Inc.**
10.1     First Amendment to Lease, dated December January 13, 1997 by and
         between the Registrant, as the Tenant, and Rockefeller Center
         Properties, as the Landlord.****
10.2     Form of 1989 Employee Incentive Stock Option Plan.*
10.3     Form of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan.*
10.4     Form of 1989 Employee Non-qualified Stock Option Plan.*
10.5     Form of Amendment No. 1 to 1989 Employee Non-qualified Stock Option
         Plan.*
10.8     1996 Non-qualified Stock Option Plan. ****
10.9     1992 Stock Appreciation Rights Plan. ****
10.10    1996 Stock Appreciation Rights Plan. ****
10.11    Employment Agreement dated August 1, 1995, as amended January 1, 1997
         between the Company and William Samuels.
10.12    Employment Agreement dated August 1, 1995, as amended January 1, 1997
         between the Company and David Reese.
10.13    Employment Agreement dated 15th day of December, 1995, as amended
         January 1, 1997 between the Company and Bruce Crowley.
10.14    Master Programming License Agreement dated December 2, 1996, by and
         between the Company and Liberty/Fox Sports, LLC. ****
10.15    Enhancement License Agreement dated December 4, 1996, by and between
         the Company and Prime Ticket Networks, L.P., d/b/a Fox Sports
         West.******, ****
10.16    Enhancement License Agreement dated February 28, 1997, by and between
         the Company and ARC Holding, Ltd., d/b/a Fox Sports Southwest.******,
         ****
10.17    Agreement dated march 30, 1995 between General Instrument Corporation
         and the Company.***
10.18    Technical Services Agreement dated May 1995 between the David Sarnoff
         Research Center, Inc. and the Company.***
10.19    Option Agreement dated December 4, 1995 between the David Sarnoff
         Research Center and the Company. ****
10.21(a) deleted
10.21(b) deleted
10.21(c) Option Agreement dated September 29, 1995 between the Company and
         Richard H. Bennett.***
10.21(d) Assignment dated September 29, 1995 between the Company and Richard H.
         Bennett.***
10.21(e) Stock Option Agreement between the Registrant and William Samuels dated
         December 1, 1995 and amended July 29, 1997.
10.21(f) Stock Option Agreement, dated March 24, 1997, by and between the
         Registrant and William C. Samuels. ****
10.21(h) Stock Option Agreement between the Registrant and David Reese dated
         December 1, 1995 and amended July 29, 1997.
10.21(j) Stock Option Agreement between the Registrant and Bruce Crowley dated
         December 1, 1995 and amended July 29, 1997.
10.22    Option Agreement, dated March 11, 1997, by and between the Registrant
         and The Washington Post Company.****
10.23(a) Stock Option Agreement between the Registrant and William Samuels dated
         February 21, 1998.
10.23(b) Stock Option Agreement between the Registrant and Bruce Crowley dated
         February 21, 1998.
10.23(c) Stock Option Agreement between the Registrant and David Reese dated
         February 21, 1998.
10.23(d) Stock Option Agreement between the Registrant and William Samuels dated
         March 24, 1997 and amended July 29, 1997.
10.23(e) Stock Option Agreement between the Registrant and Christopher Cline
         dated March 24, 1997 and amended July 29, 1997.
10.23(f) Stock Option Agreement between the Registrant and David Reese dated
         March 24, 1997 and amended July 29, 1997.
10.23(g) Stock Option Agreement between the Registrant and Bruce Crowley dated
         March 24, 1997 and amended July 29, 1997.
10.24(a) Stock Option Agreement, dated March 14, 1997, by and between ACTV Net,
         Inc. and William C. Samuels.

                                       26
<PAGE>

10.24(b) Stock Option Agreement, dated March 14, 1997, by and between ACTV Net,
         Inc. and Bruce Crowley
10.24(c) Stock Option Agreement, dated October 1, 1997, by and between ACTV Net,
         Inc. and William Samuels
10.24(d) Stock Option Agreement, dated October 1, 1997, by and between ACTV Net,
         Inc. and Bruce Crowley
10.25(a) Stock Option Agreement by and between ACTV Entertainment, Inc. and
         William Samuels dated March 14, 1997 and amended January 14, 1998.
10.25(b) Stock Option Agreement by and between ACTV Entertainment, Inc. and
         David Reese dated March 14, 1997 and amended January 14, 1998.
10.26(a) Stock Option Agreement by and between Florida Individualized Television
         Network, Inc. and William Samuels dated June 3, 1997 and amended
         January 14, 1998.
10.26(b) Stock Option Agreement by and between Northwest Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(c) Stock Option Agreement by and between New York Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(d) Stock Option Agreement by and between San Francisco Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(e) Stock Option Agreement by and between Los Angeles Individualized
         Television Network, Inc. and William Samuels dated March 14, 1997 and
         amended January 14, 1998.
10.26(f) Stock Option Agreement by and between Texas Individualized Television
         Network, Inc. and William Samuels dated March 14, 1997 and amended
         January 14, 1998.
10.26(g) Stock Option Agreement by and between Florida Individualized Television
         Network, Inc. and David Reese dated June 3, 1997 and amended January
         14, 1998.
10.26(h) Stock Option Agreement by and between Northwest Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(i) Stock Option Agreement by and between New York Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(j) Stock Option Agreement by and between San Francisco Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(k) Stock Option Agreement by and between Los Angeles Individualized
         Television Network, Inc. and David Reese dated March 14, 1997 and
         amended January 14, 1998.
10.26(l) Stock Option Agreement by and between Texas Individualized Television
         Network, Inc. and David Reese dated March 14, 1997 and amended January
         14, 1998.
10.27    ACTV Entertainment Shareholder Agreement dated March 14, 1997 and
         amended January 14, 1998.
10.28    ACTV Net Shareholder Agreement dated March 14, 1997.
10.29    ACTV Net Additional Shareholder Agreement dated October 1, 1997.
10.30    ACTV Entertainment License dated March 14, 1997 between ACTV Inc., ACTV
         Holdings and ACTV Entertainment.
10.31    ACTV Net License Agreement dated March 13, 1997 between ACTV Inc., ACTV
         Holdings and ACTV Net.
10.32    The Los Angeles Individualized Television Network, Inc. Sublicense
         Agreement dated March 14, 1997 between ACTV Entertainment and The Los
         Angeles Individualized Television Network, Inc.
10.33    The San Francisco Individualized Television Network, Inc. Sublicense
         Agreement dated January 1, 1989 between ACTV Entertainment and The San
         Francisco Individualized Television Network, Inc.
10.34    The Texas Individualized Television Network, Inc. Sublicense Agreement
         dated March 14, 1997 between ACTV Entertainment and The Texas
         Individualized Television Network, Inc.
10.35    The Los Angeles Individualized Television Network, Inc. Service
         Agreement dated March 14, 1997 between ACTV Inc., ACTV Entertainment
         and The Los Angeles Individualized Television Network, Inc.
10.36    The San Francisco Individualized Television Network, Inc. Service
         Agreement dated January 1, 1998 between ACTV Inc., ACTV Entertainment
         and The San Francisco Individualized Television Network, Inc.
10.37    The Texas Individualized Television Network, Inc. Service Agreement
         dated March 14, 1997 between ACTV Inc., ACTV Entertainment and The
         Texas Individualized Television Network, Inc.
10.38    Form of Note Purchase Agreement of the Texas Individualized Television
         Network dated as of January 13, 1998 *****
10.39    Common Stock Purchase Warrant issued pursuant to the Note Purchase
         Agreement as of January 14, 1998 *****
21       Subsidiaries of the Registrant
27       Financial Data Schedule


*        Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-34618)
**       Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1993.

                                       27
<PAGE>

***      Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-63879) which became effective on February 12, 1996.
****     Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1996.
*****    Incorporated by reference from the Exhibits to Schedule 13D filed by
         Value Partners, Ltd. on January 23, 1998.
******   Certain information contained in this exhibit has been omitted and
         filed separately with the Commission along with an application for
         non-disclosure of information pursuant to Rule 24b-2 of the Securities
         Act of 1933, as amended.


                                       28
<PAGE>


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of ACTV, Inc.:

We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the three years ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14 (a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the three years ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP


March 18, 1998
New York, New York


                                      F-1
<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

                                                   December 31,     December 31,
                                                       1996            1997
                                                   ------------    ------------
Current Assets:
   Cash and cash equivalents ...................   $  6,520,756    $    554,077
   Accounts receivable-net .....................        410,193         303,044
   Education equipment inventory ...............        337,504         237,757
   Other .......................................        316,962         308,653
                                                   ------------    ------------
       Total current assets ....................      7,585,415       1,403,531
                                                   ------------    ------------
Property and equipment-net .....................        724,089       2,596,785
                                                   ------------    ------------
Other Assets:
   Patents and patents pending .................        253,779         279,356
   Software development costs ..................             --         669,852
   Goodwill ....................................      3,067,560       2,641,188
   Other .......................................         61,781         311,206
                                                   ------------    ------------
       Total other assets ......................      3,383,120       3,901,602
                                                   ------------    ------------
            Total ..............................   $ 11,692,624    $  7,901,918
                                                   ============    ============

         LIABILITIES AND
         SHAREHOLDERS' EQUITY

Current Liabilities:
   Accounts payable and accrued expenses .......   $  1,594,655    $  1,882,159
   Deferred stock appreciation rights ..........        701,517              --
   Preferred dividends payable .................        195,384         603,469
                                                   ------------    ------------
       Total current liabilities ...............      2,491,556       2,485,628
Shareholders' equity:
   Preferred stock, $.10 par value, 1,000,000
       shares authorized, issued and
       outstanding none at December 31, 1996,
       86,200 at December 31, 1997 .............             --           8,620
   Convertible preferred stock, no par value,
       436,000 shares authorized: issued and
       outstanding 400,000  at December 31,
       1996, 316,944 at December 31, 1997 ......      9,115,664       7,029,708
   Common stock, $.10 par value, 35,000,000
       shares authorized: issued and
       outstanding 11,787,106 at December 31,
       1996, 14,614,611 at December 31, 1997 ...      1,178,711       1,461,461
   Additional paid-in capital ..................     38,272,205      44,140,596
   Notes receivable from stock sales ...........       (200,000)       (199,900)
   Accumulated deficit .........................    (39,165,512)    (47,024,195)
                                                   ------------    ------------
       Total shareholders' equity ..............      9,201,068       5,416,290
                                                   ------------    ------------
            Total ..............................   $ 11,692,624    $  7,901,918
                                                   ============    ============


                 See Notes to Consolidated Financial Statements


                                      F-2
<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS



Year Ended December 31,                  1995            1996            1997
                                      -----------    -----------    -----------
Revenues:

   Revenues .......................    $1,311,130     $1,459,540     $1,650,955
   License fees from related party            730         16,789             --
                                      -----------    -----------    -----------
      Total revenues ..............     1,311,860      1,476,329     $1,650,955

   Cost of Sales ..................       334,136        647,488        471,956
                                      -----------    -----------    -----------
      Gross profit ................       977,724        828,841      1,178,999

Expenses:

   Operating expenses .............     1,260,134      1,955,601      1,360,838
   Selling and administrative .....     4,998,020      6,332,759      6,880,311
   Depreciation and amortization ..       686,906        419,979        327,681
   Amortization of goodwill .......       426,372        426,372        426,372
   Loss on investment .............            --        274,325             --
   Stock appreciation rights ......       567,316        183,634       (346,892)
                                      -----------    -----------    -----------
      Total expenses ..............     7,938,748      9,592,670      8,648,310

Interest (income) .................      (138,510)      (158,732)      (116,870)
Interest expense--related parties .       98,392             --             --
                                      -----------    -----------    -----------
   Interest expense (income) - net        (40,118)      (158,732)      (116,870)

Loss before minority interest
   in equity of investee and
   extraordinary gain .............     6,920,906      8,605,097      7,352,441
                                      -----------    -----------    -----------

Net loss before extraordinary
gain ..............................     6,920,906      8,605,097      7,352,441
Gain on extinguishment of debt and
equipment lease obligations .......        94,117             --             --
                                      -----------    -----------    -----------
Net loss ..........................     6,826,789      8,605,097      7,352,441
Preferred stock dividend ..........            --        195,384        506,242
Loss applicable to common stock
shareholders ......................    $6,826,789     $8,800,481     $7,858,683
                                      ===========    ===========    ===========
Loss per common share before
extraordinary gain ................          $.68           $.75           $.61

Loss per common share after
extraordinary gain ................          $.67           $.75           $.61

Weighted average number of common
shares outstanding ................    10,162,128     11,739,768     12,883,848


                 See Notes to Consolidated Financial Statements


                                      F-3
<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                           Common Stock               Preferred Stock         Additional
                                   --------------------------    -------------------------   ------------
                                                                                               Paid-In
                                      Shares         Amount        Shares        Amount         Capital        Deficit
                                   -----------    -----------    ----------    -----------   ------------    ------------
<S>                                <C>            <C>              <C>         <C>           <C>             <C>
Balances January 1, 1995             9,019,550    $   901,955            --             --   $ 26,608,830    $(23,538,242)
Issuance of shares in connection
with financings                      1,990,293        199,029            --             --      8,730,627              --
Issuance of shares in connection
with exercise of stock options         308,247         30,825            --             --      1,129,924              --
Issuance of shares for services         78,329          7,833            --             --        217,361              --
Net loss                                    --             --            --             --             --      (6,826,789)
                                   -----------    -----------    ----------    -----------   ------------    ------------
Balances December 31, 1995          11,396,419    $ 1,139,642            --             --   $ 36,686,742    $(30,365,031)
                                   ===========    ===========    ==========    ===========   ============    ============
Issuance of shares in connection
with financings                        450,000         45,000       400,000      9,115,664      1,832,985
Issuance of shares for services         45,687          4,569                                     109,478
Reversal of option exercise           (105,000)       (10,500)                                   (357,000)
Net loss                                    --             --            --             --             --      (8,800,481)
                                   -----------    -----------    ----------    -----------   ------------    ------------
Balances December 31, 1996          11,787,106    $ 1,178,711       400,000    $ 9,115,664   $ 38,272,205    $(39,165,512)
                                   ===========    ===========    ==========    ===========   ============    ============
Issuance of shares in connection
with financings                        733,333         73,333        86,200          8,620      3,447,778
Issuance of shares for services        286,511         28,651                                     414,473
Issuance of shares in connection
with exchange of preferred stock     1,795,661        179,566       (83,056)    (2,085,956)     1,994,980
Issuance of shares in connection
with exercise of stock options          12,000          1,200                                      11,160
Net loss                                    --             --            --             --             --      (7,858,683)
                                   -----------    -----------    ----------    -----------   ------------    ------------
                                    14,614,611      1,461,461       403,144      7,038,328     44,140,596    $(47,024,195)
                                   ===========    ===========    ==========    ===========   ============    ============
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS



Year Ended December 31,                       1995         1996         1997
                                            ---------    ---------    ---------

Cash flows from operating activities:
     Net loss applicable to
     common shareholders ................ $(6,826,789) $(8,800,481) $(7,858,683)
                                          -----------  -----------  -----------
Adjustments to reconcile net loss to net
     cash used in operations:
     Depreciation and amortization .......  1,220,873      846,354      754,053
     Stock appreciation rights ...........   (183,309)     134,634     (701,517)
     Gain on extinguishment of
     debt obligation .....................    (94,717)          --           --
     Stock issued in lieu of cash
     compensation ........................    563,430      114,047      443,125
     Common stock issued for preferred
     dividends ...........................         --           --       98,156
     Loss on investment ..................         --      274,325           --
     Bad debt reserve ....................         --       82,746       43,188
Changes in assets and liabilities:
     Accounts receivable .................   (150,938)    (143,648)      63,960
     Education equipment inventory .......     34,065     (225,286)      99,747
     Other assets ........................     80,552     (542,824)    (241,117)
     Accounts payable and
     accrued expenses ....................    165,023      504,263      287,504
     Preferred stock dividends payable ...     93,333      195,384      408,085
                                          -----------  -----------  -----------
         Net cash used in operating
         activities ...................... (5,098,477)  (7,560,486)  (6,603,499)
                                          -----------  -----------  -----------
Cash flows from investing activities:
     Investment in patents pending .......         --           --      (50,000)
     Investment in property
     and equipment .......................   (575,323)    (444,189)  (2,159,576)
     Investment in systems ...............         --           --     (686,227)
                                          -----------  -----------  -----------
Net cash used in investing activities ....   (575,323)    (444,189)  (2,895,803)
Cash flows from financing activities:
     Proceeds from exercise of warrants
     and options .........................    122,810           --       12,360
     Proceeds from preferred
     stock issuances .....................         --    9,115,664    2,045,163
     Proceeds from equity financing ......  8,951,859    1,877,985    1,475,000
     Discounted note prepayment ..........   (101,458)          --           --
     Note repayment ...................... (2,247,469)          --          100
                                          -----------  -----------  -----------
Net cash provided by financing activities   6,725,742   10,993,649    3,532,623
                                          -----------  -----------  -----------
Net (decrease) increase in cash and cash
equivalents ..............................  1,051,942    2,988,974   (5,966,679)
     Cash and cash equivalents,
     beginning of period .................  2,479,840    3,531,782    6,520,756
                                          -----------  -----------  -----------
     Cash and cash equivalents,
     end of period .......................  3,531,782    6,520,756      554,077
                                          ===========  ===========  ===========


                 See Notes to Consolidated Financial Statements.
          Supplemental disclosure of cash flow information: See Note 15


                                      F-5
<PAGE>


ACTV, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
--------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization ACTV, Inc. was incorporated July 8, 1983. ACTV, Inc. and its
subsidiaries (the "Company" or "ACTV"), has developed and markets proprietary
technologies for individualized television programming (the "Individualized
Programming") and for Internet learning systems. Individualized Programming
permits a viewer to experience instantly responsive television. Since its
inception, the Company has been engaged in the development of Individualized
Programming, the production of programs that use its Individualized Programming
and the marketing and sales of the various products and services incorporating
the Company's Individualized Programming. In 1997, the Company introduced to the
education market eSchool Online ("eSchool"), a suite of software products that
permit a teacher to use the Internet as an accompanying instructional tool
during a live or pre-recorded video lesson.

Principles of Consolidation - The Company's consolidated financial statements
include the balances of its wholly-owned operating subsidiaries. In
consolidation, all intercompany account balances are eliminated.

Property and Equipment - Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December 31,
1995, 1996 and 1997 aggregated $70,790, $189,957 and $286,883, respectively.

Education Equipment - Education equipment consists of standard personal
computers adapted to provide individualized programming functionality,
videocassette recorders, television monitors and computer printers that the
Company holds in inventory. This inventory is carried on the Company's books at
the lower of cost or market.

Patents and Patents Pending - The cost of patents, which for patents issued
represents the consideration paid for the assignment of patent rights to the
Company by an employee and for patents pending represents legal costs related
directly to such patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 10
years), which is less than the statutory life of each patent. The balances at
December 31, 1996, and 1997, are net of accumulated amortization of $116,371 and
$141,072, respectively.

Software Development Costs - The Company capitalizes costs incurred for product
software where economic and technological feasibility has been established.
Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the respective products (5 years). The balance at
December 31, 1997, is net of accumulated amortization of $16,376.

Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.

Revenue Recognition - Sales are primarily recorded as products are shipped and
services are rendered, using the completed contract method of accounting.

Research and Development - Research and development costs, which represent
primarily refinements to the Individualized Programming, were $616,455 for the
year ended December 31, 1995, $1,221,362 for the year ended December 31, 1996,
and $551,328 for the year ended December 31, 1997.

Earnings/(Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the period ended
December 31, 1997, which establishes standards for computing and presenting
earnings per share ("EPS") and simplifies the standards for computing EPS
currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings
Per Share"). Common stock equivalents under APB No. 15 are no longer included in
the calculation of primary, or basic, EPS. Loss per common share equals net loss
divided by the weighted average number of shares of Company's common stock
("Common Stock") outstanding during the period. The Company did not consider the
effect of stock options or convertible preferred stock upon the calculation of
the loss per common share, as it would be anti-dilutive.


                                      F-6
<PAGE>

Reclassifications - Certain reclassifications have been made in the December 31,
1995, and 1996, financial statements to conform to the December 31, 1997,
presentation.

Intangibles - The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is being amortized on a straight-line
basis over a period of 10 years. On a quarterly basis, the Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business. Impairments, if any, will be recognized through a charge to
operation in the period in which the impairment is deemed to exist. Based on
such analysis, the Company does not believe that goodwill has been impaired.

Other Current Assets - The Company's consolidated balance sheets at December 31,
1996 and December 31, 1997 reflect balances of $343,962 and $224,712,
respectively, related to cash advances made to executive officers.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 130.

SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statements is effective for fiscal years beginning
after December 15, 1998. The Company has determined that the adoption of this
statement will have no effect on the financial statements.

Statement of Financial Accounting Standards No. 131.

The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1998. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.

2.     NATURE OF OPERATIONS

The principal markets for the Company's products are in-home entertainment and
education within the United States. The Company plans to sell individualized
entertainment programming (initially professional and college sports
programming) to the end user through cable television systems on a subscription
basis. The Company sells eSchool and individualized distance learning
programming and related hardware to schools, colleges, and private education
networks. No single client accounted for more than 10% of the Company's revenues
during the year ended December 31, 1997, except for Georgia Public Television,
which accounted for approximately 17% and 24% of total revenues in 1996 and
1997, respectively and the Texas Workforce Commission, which accounted for 24%
of total revenues in 1997. During 1996, the Company generated no revenues from
the Texas Workforce Commission.

3.     ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

4.     PROPERTY AND EQUIPMENT - NET

Property and equipment - net at December 31, 1996, and 1997, consisted of the
following (at cost):

                                                1996              1997
                                              --------        ----------
Machinery and equipment                       $636,845        $2,931,682
Office furniture and fixtures                  357,373           501,435
                                              --------        ----------

Total                                          994,218         3,433,117

Less accumulated depreciation                  270,129           836,332
                                              --------        ----------
Total                                         $724,089        $2,596,785
                                              ========        ==========

                                      F-7
<PAGE>


5.     EXTRAORDINARY ITEM

During 1995, the Company realized an extraordinary gain of $94,117 related to
the repayment of an obligation to a former affiliate of the Company at an amount
below the value of which such obligation was carried on the books of the
Company.

6.     FINANCING ACTIVITIES

In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the
"Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned
subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase
Agreement, dated as of January 13, 1998 (the "Agreement") with certain private
investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.

In connection with the purchase of such note, the Purchasers received on January
14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that
grants the Purchasers the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network. The Warrant expires on June 30, 2003.
The Warrant also grants the Purchasers the right, through July 14, 1999, to
exchange the Warrant for such number of shares of the Company's Common Stock, at
the time of and giving effect to such exchange, equal to 5.5% of the fully
diluted number of shares of Common Stock outstanding, after giving effect to the
exercise or conversion of all then outstanding options, warrants and other
rights to purchase or acquire shares of Common Stock. After five years from the
date of issuance, the Purchasers have the right to put the warrants to the Texas
Network for a value based on a multiple of its operating income.

Prior to June 30, 1998, should the Company form and capitalize an entity with
the intent to commence operations for a second Regional Network in one of the
ten FOX Sports Net owned and operated regions, the Purchasers have a one time
option to purchase notes from such entity on the same terms and conditions as
the Texas Network financing.

During the first three months of 1998, the Company has raised a total of $1.4
million from a series of private placements of its Common Stock.

During 1997, the Company raised approximately $3.5 million from the proceeds of
a series of private placements of Common Stock (approximately $1.5 million in
net proceeds) and Series A Convertible Preferred Stock (approximately $2.0
million in net proceeds).

During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned subsidiary ($9.1 million in net proceeds). The Convertible
Preferred Stock is convertible into Common Stock of ACTV, Inc., beginning
January 1, 1997, at varying discounts to the market price of Common Stock. After
September 1, 1997, holders of the Convertible Preferred Stock have been able to
use the lesser of (i) the then current market price of the Company's Common
Stock, or (ii) an average market price during the month of August 1997 as the
price to which the discount is applied for conversions. In addition, the Company
has the right to redeem the Convertible Preferred Stock at a price equal to $25
times the number of shares being purchased, plus accrued and unpaid dividends
(the "Redemption Price"). This right may be exercised by the Company only if the
closing price of the Company's Common Stock is above $9.00 for thirty
consecutive trading days prior to redemption. The Company believes that it is
highly likely that the holders of the Convertible Preferred Stock will elect to
convert their stock into Common Stock of the Company and, accordingly, has
included the Convertible Preferred Stock in its consolidated statement of
shareholders' equity.


                                      F-8
<PAGE>


Management of the Company believes that its current funds (taking into account
the approximately $6.4 million raised during the first three months of 1998)
will enable the Company to finance its entertainment and corporate operations at
their present level for at least the next twelve months. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional capital to finance such operations during this period. In
addition, if the Company is not successful at raising additional funds, it may
be required to significantly reduce its education operations. While the Company
believes that it has adequate funds to launch and operate its planned Southwest
Regional Network, it will need additional funding for Regional Network
expansion. While the Company has engaged an investment bank for assistance in
securing such financing, the Company has no commitments from lenders or
investors at this time and there is no assurance that it will be able to raise
the necessary capital to effect additional Regional Network launches or to
maintain its education operations at current levels. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional financing during this period.

7.     SHAREHOLDERS' EQUITY

At December 31, 1997, the Company had reserved shares of Common Stock for
issuance as follows:


1989 Qualified Stock Option Plan                                    49,567
1989 Non-Qualified Stock Option Plan                                47,250
1996 Qualified Stock Option Plan                                   380,000
Options granted outside of formal plans                          3,062,401
                                                                 ---------

  Total                                                          3,539,218
                                                                 =========

Convertible Preferred Stock  At December 31, 1997, the Company was authorized to
issue 1,000,000 shares of blank check Preferred Stock, par value $0.10 per
share, of which 120,00 shares have been designated Series A Convertible
Preferred Stock. At December 31, 1997, 86.200 shares of Series A Convertible
Preferred Stock were issued and outstanding.

Exchangeable Preferred Stock  At December 31, 1997, the Company's wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
Convertible Preferred Stock, no par value, of which 316,944 shares were issued
and outstanding.

8.     STOCK OPTIONS

During 1989, the Board of Directors approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000 options to purchase Common Stock to key employees. The Employee Plan
stipulates that the option price be not less than fair market value on the date
of grant. Options granted will have an expiration date not to exceed ten years
from the date of grant. At December 31, 1997, 97,500 options had been granted
under this plan, of which 19,000 had been exercised and 28,933 had expired or
been canceled.

In addition, in August 1989, the Board of Directors approved a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee appointed by the Board. The Non-Qualified Plan provides for the
granting of up to 100,000 options to purchase shares of Common Stock to
employees, officers, directors, consultants and independent contractors. The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant, or such other price as the Board may determine.
Options granted under this Plan shall expire on a date determined by the
committee but in no event later than three months after the termination of
employment or retainer. At December 31, 1997, 97,000 options had been granted
under this plan, of which 22,250 had been exercised and 27,500 had expired or
been canceled.

During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1996 Option Plan, the Company is authorized to issue options for a total of
500,000 shares of Common Stock.


                                      F-9
<PAGE>


As of December 31, 1997, the Company had issued 430,000 options under the plan,
of which none had been exercised and 50,000 had been canceled.

At December 31, 1997, the Company also had outstanding options that were issued
to Directors, certain employees and consultants for the purchase of 3,062,401
shares of Common Stock that were not issued pursuant to a formal plan. The
prices of these options range from $1.50 to $5.50 per share; they have
expiration dates in the years 1998 through 2003. The options granted are not
part of the Employee Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan discussed above.

A summary of the status of the Company's stock options as of December 31, 1997,
1996 and 1995 is as follows:

                                        1997              1996              1995
                                       Wgtd.             Wgtd.             Wgtd.
                                        Avg.              Avg.              Avg.
                                 1997   Exer       1996   Exer       1995   Exer
                               Shares  Price     Shares  Price     Shares  Price
                            ----------------------------------------------------
Outstanding at beginning
of period                   3,328,718         2,747,082         1,605,104
Options granted               339,683  $1.91    887,500  $3.73  1,706,087  $3.41
Options exercised              17,000  $0.73         --     --    141,833  $2.33
Options terminated            112,183  $4.06    305,864  $3.76    422,276  $5.27
Outstanding at end
of period                   3,539,218  $1.81  3,328,718  $2.99  2,747,082  $3.27
Options exercisable at
end of period               2,363,134  $1.87  1,719,134  $3.19  1,091,083  $3.04




The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                   Weighted
                                      Aver-                                             Weighted
                        Number          age      Weighted                                  Aver-
                   Outstanding    Remaining         Aver-                    Number          age
         Range of           at  Contractual  age Exercise            Exercisable at     Exercise
  Exercise Prices     12/31/97         Life         Price                  12/31/97        Price
-------------------------------------------------------------------------------------------------
<S>                  <C>          <C>               <C>                   <C>              <C>
        0 to 1.50    2,822,718    5.0 Years         $1.50                 1,757,053        $1.50
     1.51 to 3.50      474,000    1.7 Years         $2.52                   446,915        $2.52
     3.51 to 5.50      242,500    1.7 Years         $4.05                   159,166        $4.18
</TABLE>


The weighted average fair value of options granted during 1996 and 1997 was
$1.21 and $.64 per share, respectively, excluding the value of options granted
and terminated within the year. In the case of each issuance, options were
issued at an exercise price that was higher than the fair market value of the
Company's Common Stock on the date of grant. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for option issuances. Had compensation cost for the Company's option
issuances been determined based on the fair value at the grant dates consistent
with the method of FASB Statement 123, the Company's net loss and loss per share
for the years ended December 31, 1995, 1996 and 1997 would have been increased
to the pro forma amounts indicated below:


                                      F-10
<PAGE>


Net loss to common shareholders        1995           1996           1997
                                       ----           ----           ----
         As reported                $6,826,789     $8,800,481    $7,858,683
         Pro forma                  $9,506,556     $9,685,735    $8,074,807

Net loss per common share              1995           1996           1997
                                       ----           ----           ----
         As reported                  $0.67          $0.75          $0.61
         Pro forma                    $0.94          $0.83          $0.63



The Company estimated the fair value of options issued during 1995, 1996 and
1997 on the date of each grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend yield, expected
volatility for 1995 and 1996 of 61.5%, expected volatility for 1997 of 57.3%,
and a risk free interest rate of 6% for all years.

Certain employees, including the executive officers Samuels, Reese, Crowley and
Cline, have been granted options to purchase Class B Common Stock, at fair value
as of the date of grant, of certain of the Company's subsidiaries; such common
stock, if issued, will have majority voting rights in such subsidiaries.

9.     STOCK APPRECIATION RIGHTS PLANS

The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. Subject to adjustment
as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.

The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided, however, that at no time shall there be more than
an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards may be made.

Both the 1992 and 1996 SAR Plans are administered by the Stock Appreciation
Rights Committee (the "SAR Committee").

SARs may not be exercised until the six months from the date of grant. SARs
issued pursuant to the 1992 SAR Plan vest in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest either in a lump sum or in such installments, which need not be
equal, as the Committee shall determine. If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic relations order as defined in the Internal Revenue Code
of 1986, as amended.

Upon exercise of a SAR, the holder will receive for each share for which a SAR
is exercised, as determined by the SAR Committee in its discretion, (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common Stock, equal to the difference between (i) the fair market value per
share of the Common Stock on the date of exercise of the SAR and (ii) the value
of a SAR, which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.

Under the Company's 1992 SAR Plan, as of December 31, 1997, the Company has
granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to
ten employees. The SARs expire between 2001 and 2006. Under the Company's 1996
SAR Plan, as of December 31, 1997, the Company has granted 380,000 outstanding
SARs (with an


                                      F-11
<PAGE>


exercise price of $1.50 per share) to six employees. The SARs expire between
2002 and 2006. During 1997, a total of 203,000 SARs were exercised under both
plans.

10.    INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".

Deferred income taxes reflect the net tax effects at an effective tax rate of
35.33% of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1996, and December 31, 1997, are as follows:

                                                     1996              1997
                                                 ------------      ------------
        Deferred tax assets:
               Operating loss carryforwards      $ 13,365,772      $ 16,131,213
               Differences between book and
                  tax basis of property                34,019            56,148
                                                 ------------      ------------
                                                   13,399,791        16,187,361
        Deferred tax liabilities:
               Differences between book and
                  tax basis of property              (106,819)         (181,104)
                                                 ------------      ------------
                                                   13,292,972        16,000,257

        Valuation Allowance                       (13,292,972)      (16,000,257)
                                                 ------------      ------------
        Net deferred tax asset                   $          0      $          0
                                                 ============      ============

The increase in the valuation allowance for the year ended December 31, 1997,
was approximately $2.7 million. There was no provision or benefit for federal
income taxes as a result of the net operating loss in the current year.

At December 31, 1997, the Company has Federal net operating loss carryovers of
approximately $45.7 million. These carryovers may be subject to certain
limitations and will expire between the years 1998 and 2012.

11.    COMMITMENTS

At December 31, 1997, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $900,000. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1995, 1996 and 1997 aggregated $176,264, $129,600, and
$330,430 respectively. The Company has employment agreements with certain key
employees. These agreements extend for a period of a maximum of five years and
contain non-competition provisions which extend two years after termination of
employment with the Company. At December 31, 1997, the Company is committed to
expend a total of approximately $2.7 million under these agreements.

12.    CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables.
The Company attempts to mitigate cash investment risks by placing such
investments in insured depository accounts and with financial institutions that
have high credit ratings. Concentrations of risk with respect to trade
receivables exist because of the relatively few companies or other organizations
(primarily educational or government bodies) with which the Company currently
does business. The Company attempts to limit these risks by closely monitoring
the credit of those to whom it is contemplating providing its products, and
continuing such credit monitoring activities and other collection activities
throughout the payment period. In certain instances, the Company further
minimizes concentrations of credit risks by requiring partial advance payments
for the products provided.


                                      F-12
<PAGE>

13.   FAIR VALUE OF FINANCIAL INSTRUMENTS

For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accruals, the carrying amounts approximated fair
value because of their short maturity.

14.   INVESTMENT AND ADJUSTMENTS

In January 1995, the Company invested $274,325 in the common stock
(approximately 15% of ownership interest) of a company (the "Licensee"), which
had licensed the Company's Individualized Progrmming for commercialization in
special-purpose theaters.

The Company also performed executive production services for the Licensee on a
fee basis. During 1996, the Company recorded license fee and production service
revenue from the Licensee of $16,789 and $199,666, respectively. At December 31,
1996, the Company had unpaid receivables pursuant to such revenues of $82,746.

During 1997, the Licensee filed for liquidation under United States Bankruptcy
laws. In anticipation of such filing, at December 31, 1996 the Company provided
a reserve for the full amount of the receivables outstanding of $82,746 and a
valuation allowance for its full investment in the Licensee of $274,325.

15.   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The consolidated balance sheet at December 31, 1996, reflects non-cash activity
during the year ended December 31, 1996, that relates to a reversal of certain
of the option exercises and resulting non-recourse loan transactions described
above: a credit to shareholders' equity of $367,500.

The Company made no cash payments of interest or income taxes during the years
ended December 31, 1996 and 1997.


                                      F-13
<PAGE>


                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of New York
and State of New York on the 27th day of March 1998.

                                                       ACTV, Inc.

                                                       By: /s/William C. Samuels
                                                           ---------------------
                                                           William C. Samuels
                                                           Chairman and Chief
                                                           Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.

Signature                  Title                                  Date
---------                  -----                                  ----


/s/ William C. Samuels     Chairman of the Board, Chief           March 27, 1998
------------------------   Executive Officer, President
William C. Samuels         and Director


/s/ David Reese            Executive Vice President,              March 27, 1998
------------------------   President - ACTV Entertainment, Inc.,
David Reese                and Director


/s/ Bruce Crowley          Executive Vice President,              March 27, 1998
------------------------   President - ACTV Net Inc.,
Bruce Crowley              and Director


/s/ Christopher C. Cline   Senior Vice President, Chief           March 27, 1998
------------------------   Financial Officer and Secretary
Christopher C. Cline


/s/ William Frank          Director                               March 27, 1998
------------------------
William A. Frank


/s/ Richard Hyman          Director                               March 27, 1998
------------------------
Richard Hyman


/s/ Jess Ravich            Director                               March 27, 1998
------------------------
Jess Ravich


/s/ Steven W. Schuster     Director                               March 27, 1998
------------------------
Steven W. Schuster

<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                   ACTV, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)







                                    EXHIBITS

<PAGE>



                                  EXHIBIT INDEX


3.1.a    Restated Certificate of Incorporation of the Company.*
3.1.b    Amendment to Certificate of Incorporation of the Company.**
3.2      By-Laws of the Company.*
9.1      Voting Agreement dated November 11, 1994, by and between William C.
         Samuels and Michael J. Freeman.***
9.2      Voting Trust Agreement dated March 10, 1994 by and among William C.
         Samuels, The Washington Post Company and ACTV, Inc.**
10.1     First Amendment to Lease, dated December January 13, 1997 by and
         between the Registrant, as the Tenant, and Rockefeller Center
         Properties, as the Landlord.****
10.2     Form of 1989 Employee Incentive Stock Option Plan.*
10.3     Form of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan.*
10.4     Form of 1989 Employee Non-qualified Stock Option Plan.*
10.5     Form of Amendment No. 1 to 1989 Employee Non-qualified Stock Option
         Plan.*
10.8     1996 Non-qualified Stock Option Plan. ****
10.9     1992 Stock Appreciation Rights Plan. ****
10.10    1996 Stock Appreciation Rights Plan. ****
10.11    Employment Agreement dated August 1, 1995, as amended January 1, 1997
         between the Company and William Samuels.
10.12    Employment Agreement dated August 1, 1995, as amended January 1, 1997
         between the Company and David Reese.
10.13    Employment Agreement dated 15th day of December, 1995, as amended
         January 1, 1997 between the Company and Bruce Crowley.
10.14    Master Programming License Agreement dated December 2, 1996, by and
         between the Company and Liberty/Fox Sports, LLC. ****
10.15    Enhancement License Agreement dated December 4, 1996, by and between
         the Company and Prime Ticket Networks, L.P., d/b/a Fox Sports
         West.******, ****
10.16    Enhancement License Agreement dated February 28, 1997, by and between
         the Company and ARC Holding, Ltd., d/b/a Fox Sports Southwest.******,
         ****
10.17    Agreement dated march 30, 1995 between General Instrument Corporation
         and the Company.***
10.18    Technical Services Agreement dated May 1995 between the David Sarnoff
         Research Center, Inc. and the Company.***
10.19    Option Agreement dated December 4, 1995 between the David Sarnoff
         Research Center and the Company. ****
10.21(a) deleted
10.21(b) deleted
10.21(c) Option Agreement dated September 29, 1995 between the Company and
         Richard H. Bennett.***
10.21(d) Assignment dated September 29, 1995 between the Company and Richard H.
         Bennett.***
10.21(e) Stock Option Agreement between the Registrant and William Samuels dated
         December 1, 1995 and amended July 29, 1997.
10.21(f) Stock Option Agreement, dated March 24, 1997, by and between the
         Registrant and William C. Samuels. ****
10.21(h) Stock Option Agreement between the Registrant and David Reese dated
         December 1, 1995 and amended July 29, 1997.
10.21(j) Stock Option Agreement between the Registrant and Bruce Crowley dated
         December 1, 1995 and amended July 29, 1997.
10.22    Option Agreement, dated March 11, 1997, by and between the Registrant
         and The Washington Post Company.****
10.23(a) Stock Option Agreement between the Registrant and William Samuels dated
         February 21, 1998.
10.23(b) Stock Option Agreement between the Registrant and Bruce Crowley dated
         February 21, 1998.
10.23(c) Stock Option Agreement between the Registrant and David Reese dated
         February 21, 1998.
10.23(d) Stock Option Agreement between the Registrant and William Samuels dated
         March 24, 1997 and amended July 29, 1997.
10.23(e) Stock Option Agreement between the Registrant and Christopher Cline
         dated March 24, 1997 and amended July 29, 1997.

<PAGE>


10.23(f) Stock Option Agreement between the Registrant and David Reese dated
         March 24, 1997 and amended July 29, 1997.
10.23(g) Stock Option Agreement between the Registrant and Bruce Crowley dated
         March 24, 1997 and amended July 29, 1997.
10.24(a) Stock Option Agreement, dated March 14, 1997, by and between ACTV Net,
         Inc. and William C. Samuels.
10.24(b) Stock Option Agreement, dated March 14, 1997, by and between ACTV Net,
         Inc. and Bruce Crowley
10.24(c) Stock Option Agreement, dated October 1, 1997, by and between ACTV Net,
         Inc. and William Samuels
10.24(d) Stock Option Agreement, dated October 1, 1997, by and between ACTV Net,
         Inc. and Bruce Crowley
10.25(a) Stock Option Agreement by and between ACTV Entertainment, Inc. and
         William Samuels dated March 14, 1997 and amended January 14, 1998.
10.25(b) Stock  Option  Agreement by and between  ACTV  Entertainment,  Inc. and
         David Reese dated March 14, 1997 and amended January 14, 1998.
10.26(a) Stock Option Agreement by and between Florida Individualized Television
         Network, Inc. and William Samuels dated June 3, 1997 and amended
         January 14, 1998.
10.26(b) Stock Option Agreement by and between Northwest Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(c) Stock Option Agreement by and between New York Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(d) Stock Option Agreement by and between San Francisco Individualized
         Television Network, Inc. and William Samuels dated June 3, 1997 and
         amended January 14, 1998.
10.26(e) Stock Option Agreement by and between Los Angeles Individualized
         Television Network, Inc. and William Samuels dated March 14, 1997 and
         amended January 14, 1998.
10.26(f) Stock Option Agreement by and between Texas Individualized Television
         Network, Inc. and William Samuels dated March 14, 1997 and amended
         January 14, 1998.
10.26(g) Stock Option Agreement by and between Florida Individualized Television
         Network, Inc. and David Reese dated June 3, 1997 and amended January
         14, 1998.
10.26(h) Stock Option Agreement by and between Northwest Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(i) Stock Option Agreement by and between New York Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(j) Stock Option Agreement by and between San Francisco Individualized
         Television Network, Inc. and David Reese dated June 3, 1997 and amended
         January 14, 1998.
10.26(k) Stock Option Agreement by and between Los Angeles Individualized
         Television Network, Inc. and David Reese dated March 14, 1997 and
         amended January 14, 1998.
10.26(l) Stock Option Agreement by and between Texas Individualized Television
         Network, Inc. and David Reese dated March 14, 1997 and amended January
         14, 1998.
10.27    ACTV Entertainment Shareholder Agreement dated March 14, 1997 and
         amended January 14, 1998.
10.28    ACTV Net Shareholder Agreement dated March 14, 1997.
10.29    ACTV Net Additional Shareholder Agreement dated October 1, 1997.
10.30    ACTV Entertainment License dated March 14, 1997 between ACTV Inc., ACTV
         Holdings and ACTV Entertainment.
10.31    ACTV Net License Agreement dated March 13, 1997 between ACTV Inc., ACTV
         Holdings and ACTV Net.
10.32    The Los Angeles Individualized Television Network, Inc. Sublicense
         Agreement dated March 14, 1997 between ACTV Entertainment and The Los
         Angeles Individualized Television Network, Inc.
10.33    The San Francisco Individualized Television Network, Inc. Sublicense
         Agreement dated January 1, 1989 between ACTV Entertainment and The San
         Francisco Individualized Television Network, Inc.
10.34    The Texas Individualized Television Network, Inc. Sublicense Agreement
         dated March 14, 1997 between ACTV Entertainment and The Texas
         Individualized Television Network, Inc.
10.35    The Los Angeles Individualized Television Network, Inc. Service
         Agreement dated March 14, 1997 between ACTV Inc., ACTV Entertainment
         and The Los Angeles Individualized Television Network, Inc.
10.36    The San Francisco Individualized Television Network, Inc. Service
         Agreement dated January 1, 1998 between ACTV Inc., ACTV Entertainment
         and The San Francisco Individualized Television Network, Inc.
10.37    The Texas Individualized Television Network, Inc. Service Agreement
         dated March 14, 1997 between ACTV Inc., ACTV Entertainment and The
         Texas Individualized Television Network, Inc.
10.38    Form of Note Purchase Agreement of the Texas Individualized Television
         Network dated as of January 13, 1998 *****

<PAGE>


10.39    Common Stock Purchase Warrant issued pursuant to the Note Purchase
         Agreement as of January 14, 1998 *****
21       Subsidiaries of the Registrant
27       Financial Data Schedule


*        Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-34618)
**       Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1993.
***      Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-63879) which became effective on February 12, 1996.
****     Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1996.
*****    Incorporated by reference from the Exhibits to Schedule 13D filed by
         Value Partners, Ltd. on January 23, 1998.
******   Certain information contained in this exhibit has been omitted and
         filed separately with the Commission along with an application for
         non-disclosure of information pursuant to Rule 24b-2 of the Securities
         Act of 1933, as amended.